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The Form 990 and its many schedules remained largely unchanged for tax year 2016. The changes can be summarized pretty quickly, and include the following:

For returns that cannot be electronically filed, the IRS previously considered returns that were delivered via USPS, FedEx and UPS as timely filed if postmarked at least by the due date of the return. The IRS has added DHL Express to this listing. Whenever a return is mailed to the IRS, regardless of the service used, we encourage you to obtain and retain the receipt for proof of mailing. That way, if the IRS later assesses a penalty for late filing, you’ll have proof that the return was filed on time and will be able to easily have the penalties abated.

For tax years beginning after 12/31/15, the first extension for Form 990 and 990-EZ will cover a six-month period. A second extension is no longer available. Previously, two three-month extensions were available. Form 990 is due 4 ½ months after year end. The extension makes the return due 10 ½ months after year end. Thus, the final filing due date with extensions remains unchanged.

The publicly supported charity definition has been updated to include an agricultural research organization under Internal Revenue Code (IRC) 170(b)(1)(A)(ix). This only pertains to IRC 501(c)(3) organizations that are exempt as a public charity and operate as agricultural research organizations. In other words, it doesn’t affect most organizations.

Goods or services with insubstantial value have been indexed for inflation. The value of items valued at $10.60 or less that bear the organization’s name or logo and are given to donors in exchange for a donation need not be disclosed to the donor.

For Hospitals, a few minor changes have been made to Schedule H to better reflect compliance with the final regulations under 501(r)..

Form 990-T has been updated to include a specific line for tax on hospitals that are not compliant with IRC 501(r) regulations. The tax is not new. Only the line on the form is new.

Beyond Form 990 itself, you may be interested in the following nonprofit related tax issues:

If your organization hires veterans, you may be eligible for a credit against the employer portion of social security tax on wages paid to all employees. The credit applies to qualified first-year wages paid to qualified veterans who began work for the organization after December 31, 2014 and before January 1, 2020. The qualified veteran must be performing services in activities related to the purpose or function constituting the basis of the organization’s tax exempt status under IRC 501. The credit is claimed on Form 5884-C.

If your organization has foreign bank accounts with an aggregate value exceeding $10,000 at any time during the calendar year, Form 114 FinCEN, Report of Foreign Bank and Financial Accounts (FBAR) is required to be filed by April 15. A six-month extension is available. Previously, this form was due June 30 with no extensions.

Many nonprofit organizations utilize single member limited liability companies (SMLLCs) in their operations. SMLLCs are popular vehicles for holding real estate and are an easy way to conduct separate activities in different locations. For example, a skilled nursing or senior care corporation might consist of various locations or centers each held within its own SMLLC. This provides a vessel for managing the operations and profitability of each location more effectively and accurately.

Because a SMLLC is considered a disregarded entity for federal tax purposes, the IRS allows the SMLLC to operate as a tax exempt entity without seeking its own application for tax exempt status. This makes the SMLLC a relatively low cost entity to create while affording the parent an additional level of liability protection through an isolating entity.

For more information on SMLLCs and tax exemption, read the full article here.

In efforts to provide information about tax exempt organizations to the general public, the IRS has announced that data from previously filed and approved Form 1023-EZ applications will be available electronically.

The IRS released the streamlined exemption application in July 2014 to assist smaller organizations in obtaining tax-exempt status under 501(c)(3). Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The 1023-EZ contains limited information, but does include the following:

Name, address and phone number

Year-end

Employer identification number

Names of officers, directors and trustees

Whether the organization is a corporation, unincorporated association, or trust

Date of incorporation and applicable state

NTEE Code that describes intended activities as well as several yes/no questions about activities; such as whether or not compensation will be paid to any officers, directors or trustees

Type of classification – public charity or private foundation

This data will be updated quarterly on the IRS website and will allow taxpayers to more easily research information on tax exempt organizations. To read the full news release click here.

With all the changes that occur within an organization during the course of a year, it’s important to take a step back and review policies and procedures at the beginning of the year. For example, it’s critical that an organization classify its workers properly. Are your workers employees, or independent contractors? Let’s take a look at the rules to make sure workers are classified in accordance with IRS guidelines for the coming year.

In general, a person will qualify as an independent contractor if the employer has the right to control or direct the result of the work, but not how or what will be done to achieve the end result. Conversely, in an employer-employee relationship, the employer has the right to direct and control the work done by the employee. Visit our website here for factors that are important in determining worker classification.

The allocation of expenses among program, management & general (M&G), and fundraising functions is sometimes a mysterious process, often left to chance or defaulted to SALY (same as last year), or, in certain unfortunate cases, is determined based on desired ratio outcomes. If done properly, the allocation methodologies can be as diverse as the nature of the expenses incurred.

For those wanting to “do things right,” why the confusion?

One reason is the sometimes over-generalization of the requirements, which themselves are rather sparse in the FASB Accounting Standards Codification (ASC). For example, the definition of program services found in the ASC is “The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the not-for-profit entity (NFP) exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs.” Little wonder that a question often heard is, “Aren’t all of our expenses incurred in fulfilling our mission?”

A more useful reference can be found in the AICPA Audit and Accounting Guide, Not-For-Profit Entities (Guide), which provides helpful guidance in Chapter 13, Expenses, Gains and Losses.

Program-related investments (PRIs) are nothing new to the nonprofit industry; however, the IRS has spent the last few years issuing proposed regulations, reviewing comments from the community, and then issuing final regulations in April 2016. While the underlying rules for PRIs remained unchanged, the final regulations outlined additional examples of investments with a charitable purpose that qualify as PRIs.

The rules and regulations are directed at investments made by private foundations. Public charities can also take advantage of PRIs without being subjected to the same restrictions as private foundations. While there is no formal guidance issued for public charities making PRIs, public charities should follow the private foundation regulations as a guide and best practice. To learn more about PRIs read the full article here.

Nonprofit organizations, much like public companies, rely on their external audit firm to perform a quality engagement. The audit committee plays a critical role in the governance of nonprofit organizations and one of the tasks assigned to this group is the evaluation of the audit firm.

The AICPA’s Audit Committee Toolkit for Not-for-Profit Entities (3rd Edition) contains a chapter devoted to the evaluation of the audit firm, including the following excerpts of considerations:

Quality of Resources and Services: Does the audit team identify and discuss appropriate risks in planning the audit?

Quality of Communications: Is the auditor comfortable raising issues that would reflect negatively on management?

Independence and Objectivity: Are you confident that the audit team maintains appropriate objectivity and professional skepticism?

Questions for Management: Are you satisfied with the knowledge, skills and abilities of the staff assigned to the audit engagement?

These queries, and many more, can be found in the Toolkit referenced above. If you don’t have access to this valuable document, consider joining the AICPA’s Not-for-Profit Section where you can find resources devoted to assurance, financial accounting & reporting, governance & management and tax compliance.

As always, feel free to contact Eide Bailly with any questions regarding this topic!